"If, however, we suppose that money is used, these propositions cease to be exactly true. It must be admitted that no person desires money for its own sake, (unless some very rare cases of misers be an exception,) and that he who sells his commodity, receiving money in exchange, does so with the intention of buying with that same money some other commodity. Interchange by means of money is therefore, as has been often observed, ultimately nothing but barter. But there is this difference—that in the case of barter, the selling and the buying are simultaneously confounded in one operation; you sell what you have, and buy what you want, by one indivisible act, and you cannot do the one without doing the other. Now the effect of the employment of money, and even the utility of it, is, that it enables this one act of interchange to be divided into two separate acts or operations; one of which may be performed now, and the other a year hence, or whenever it shall be most convenient. Although he who sells, really sells only to buy, he needs not buy at the same moment when he sells; and he does not therefore necessarily add to the immediate demand for one commodity when he adds to the supply of another. The buying and selling being now separated, it may very well occur, that there may be, at some given time, a very general inclination to sell with as little delay as possible, accompanied with an equally general inclination to defer all purchases as long as possible. This is always actually the case, in those periods which are described as periods of general excess. And no one, after sufficient explanation, will contest the possibility of general excess, in this sense of the word. The state of things which we have just described, and which is of no uncommon occurrence, amounts to it.

For when there is a general anxiety to sell; and a general disinclination to buy, commodities of all kinds remain for a long time unsold, and those which find an immediate market, do so at a very low price. If it be said that when all commodities fall in price, the fall is of no consequence, since mere money price is not material while the relative value of all commodities remains the same, we answer that this would be true if the low prices were to last for ever. But as it is certain that prices will rise again sooner or later, the person who is obliged by necessity to sell his commodity at a low money price is really a sufferer, the money he receives sinking shortly to its ordinary value. Every person, therefore, delays selling if he can, keeping his capital unproductive in the mean time, and sustaining the consequent loss of interest. There is stagnation to those who are not obliged to sell, and distress to those who are.

It is true that this state can be only temporary, and must even be succeeded by a reaction of corresponding violence, since those who have sold without buying will certainly buy at last, and there will then be more buyers than sellers. But although the general over-supply is of necessity only temporary, this is no more than may be said of every partial over-supply. An overstocked state of the market is always temporary, and is generally followed by a more than common briskness of demand."

All excellent. Then we get into two paragraphs where it becomes clear that his sense of being different from Malthus boils down to quibbling over definitions - the arguments are largely the same:

"In order to render the argument for the impossibility of an excess of all commodities applicable to the case in which a circulating medium is employed, money must itself be considered as a commodity. It must, undoubtedly, be admitted that there cannot be an excess of all other commodities, and an excess of money at the same time.

But those who have, at periods such as we have described, affirmed that there was an excess of all commodities, never pretended that money was one of these commodities; they held that there was not an excess, but a deficiency of the circulating medium. What they called a general superabundance, was not a superabundance of commodities relatively to commodities, but a superabundance of all commodities relatively to money. What it amounted to was, that persons in general, at that particular time, from a general expectation of being called upon to meet sudden demands, liked better to possess money than any other commodity. Money, consequently, was in request, and all other commodities were in comparative disrepute. In extreme cases, money is collected in masses, and hoarded; in the milder cases, people merely defer parting with their money, or coming under any new engagements to part with it. But the result is, that all commodities fall in price, or become unsaleable. When this happens to one single commodity, there is said to be a superabundance of that commodity; and if that be a proper expression, there would seem to be in the nature of the case no particular impropriety in saying that there is a superabundance of all or most commodities, when all or most of them are in this same predicament."

And then he gets into a section where he is really arguing against overproductionism. This is where Keynes starts to get more useful than Mill:

"The argument against the possibility of general over-production is quite conclusive, so far as it applies to the doctrine that a country may accumulate capital too fast; that produce in general may, by increasing faster than the demand for it, reduce all producers to distress. This proposition, strange to say, was almost a received doctrine as lately as thirty years ago; and the merit of those who have exploded it is much greater than might be inferred from the extreme obviousness of its absurdity when it is stated in its native simplicity. It is true that if all the wants of all the inhabitants of a country were fully satisfied, no further capital could find useful employment; but, in that case, none would be accumulated. So long as there remain any persons not possessed, we do not say of subsistence, but of the most refined luxuries, and who would work to possess them, there is employment for capital; and if the commodities which these persons want are not produced and placed at their disposal, it can only be because capital does not exist, disposable for the purpose of employing, if not any other labourers, those very labourers themselves, in producing the articles for their own consumption. Nothing can be more chimerical than the fear that the accumulation of capital should produce poverty and not wealth, or that it will ever take place too fast for its own end. Nothing is more true than that it is produce which constitutes the market for produce, and that every increase of production, if distributed without miscalculation among all kinds of produce in the proportion which private interest would dictate, creates, or rather constitutes, its own demand."

I agree, overproduction is not a big concern. Maybe automation in a sector throws a lot of people out of work temporarily, but it's not a convincing argument for a general depression. However, even if capital isn't accumulated too fast perhaps a given accumulation of capital becomes unprofitable to use because of a disturbance to expectations about future demand. And what if that disturbance of expectations comes along with uncertainty that leads to an increased demand for money?
And what if these expectational shocks are self-perpetuating. Mill is still right that it is temporary, but we could be in a mess for a while. These sorts of shocks make a lot of sense to worry about, even if Mill's point about the problems with an overproductionist argument still stand (which I think they do, as framed).

15 comments:

I see Mill making a number of vital distinctions here which separate him from both the underconsumptionists and Keynes. He obviously sees his view as in strong opposition to the "fallacies" of the underconsumptionists, calling out Mr. Attwood by name. So he is attacking the underconsumptionist in terms as strongly as my own even while acknowledging the issues that arise from excess demand for money.

This distinction is central to everything I've written about this subject which you find so "baffling". Money is a specific good. In times of duress, people may seek to hold more of it. As Mill explains, people may seek to sell their output for money as quickly as possible but delay the exchange of their money for other goods as long as they can. In this event, prices for that which they do not buy will fall without any corresponding rise in other prices. So the so-called "price level" will fall.

Mill, Hume, Ricardo, Hayek and most of the mainline thinkers understood this to be a potentially bad situation depending on the impediments to price and wage adjustments.

In this case, the solution is to increase the supply of money, the good being demanded, such that there is no money-demand deflation. So far, so good.

But Mill is very rightly and forcefully distinguishing this from the notion of "overproduction" because framing the phenomena in this way produces a fallacy of aggregation. There is no such thing as "goods in general". People cannot and do not cease demanding "goods in general" when they increase their demand for money. A spread of relative prices and changes in them remains in effect. To aggregate all goods such that they move in opposite to money is linguistic shorthand but not a real thing. In a sense, it's the nexus between the "real" and the "nominal" in macro.

What I see Mill as attempting to prevent is Keynes-style anaylsis where an increase in ANY consumption, productive or unproductive, can resolve the increased demand for money. He's warning against attempting to cure an increased demand for money with increasing the demand for goods. These are NOT the same thing. The former costs social nothing and actually increases the supply of the singular good in demand. The latter is an impossible enterprise most likely to result in costing the society greatly through the waste of resources.

It is through this distinction between demand for a real good (money) and an inverse fall in demand of specific goods which are then linguistically summarized and aggregated is the KEY.

So I believe Mill would look at the Keynesian solutions to an increase in hoarding and proclaim them a fallacy. Increasing government spending as a way to solve excess money demand will be wasteful and compound mistake upon mistake. The same is even more true for policies which attempt to increase the degree of consumption. This is the cure overproduction by using up what was overproduced Malthusian approach. Mill clearly seems to reject this.

What Mill understood was that in the aggregate there is no distinction between demand and supply. They are one-and-the-same. Demand is constituted by supply. He includes money as a commodity, which makes "Say's Law" always hold. If you remove money, Say's law holds provided there is monetary equilibrium.

Right - overproduction is a different case. "General glut" is certainly a more general term you could apply to overproduction. But if we are talking about a Malthusian type view excess demand for money is a general glut.

If you insist on redefining terms and divorcing general gluts from excess demand for money, at the very least don't go around calling this anti-Keynesian or anti-Malthusian. At least apply your redefined terms consistently.

re: "So I believe Mill would look at the Keynesian solutions to an increase in hoarding and proclaim them a fallacy."

But you just said above that the solution was printing more money. That is a Keynesian solution, John. It is, as you say, a solution that most mainline economists from Smith to Malthus to Ricardo to Mill to Say to Keynes have embraced. Unfortunately, it's not one a lot of modern Austrians embrace.

There are disagreements on fiscal policy, but he is making Keynesian arguments here and (although I haven't read it in detail - you can provide a passage if you wnat), I don't think he really delves at all into the problems that lead Keynes to advocate fiscal policy. In the beginning where he critiques policy encouraging people to consume he seems to me to be criticizing long-run demand led growth policies.

Mill isn't perfect here. He doesn't present all that Keynes does. But he is dead clear on the prospects of a general glut and that it comes from deficient demand because of the nature of monetary economies: NOT underconsumptionism, and NOT overproductionism. In other words, he's on Keynes's side of the question that he considers (even if he doesn't consider a lot of other points that Keynes raises).

On your last paragraph - be careful not to confuse quantity demanded and quantity supplied with the demand schedule and the supply schedule.

"But you just said above that the solution was printing more money. That is a Keynesian solution, John."

No, there's nothing uniquely "Keynesian" about that solution at all. What's uniquely "Keynesian" is the claim that at the zero-bound, this solution "loses traction" because money demand effectively becomes "infinite" in a "liquidity trap". THAT is "Keynesian". It's uniquely "keynesian" to claim that private consumption or government consumption of real resources can accomplish the goal instead of expanding the supply of money to meet demand. What's uniquely "keynesian" and Malthusian is the sloppy conflation of savings with hoarding.

Remember, if money is being hoarded, it's not being used to buy government bonds any more than to supply private businesses with loanable funds. It's sitting in a mattress.

And, we have a modern record on this very issue. Only Scott Sumner and the market monetarists were saying that money was too tight and could be loosened to accommidate demand in 2008 and 2009. The "Keynesians" were all saying that the Fed was "out of bullets" and were pushing for so-called "fiscal stimulus".

To call a pre-keynesian insights "keynesian", especially when Keynes' main objective was to point out why these insights DON'T WORK is, in my opinion, wrong.

1. Nobody said it was uniquely Keynesian. I said it was Mill's solution and he's obviously not a Keynesian!!!

2. re: "It's uniquely "keynesian" to claim that private consumption or government consumption of real resources can accomplish the goal instead of expanding the supply of money to meet demand.". You need to read Krugman's BPEA paper or something else in that vein. And if you're going to bitch about "I don't care about JSTOR" then you shouldn't be writing sentences like this.

3. re: "What's uniquely "keynesian" and Malthusian is the sloppy conflation of savings with hoarding." Malthus maybe. I would think what is uniquely "Keynesian" is finally making a distinction between savings, liquidity, and hoarding. You seem to be taking the very issue that Keynesian theory cleared up and accusing it of the crudest version of the issue! Come on John.

4. re: "Remember, if money is being hoarded, it's not being used to buy government bonds any more than to supply private businesses with loanable funds. It's sitting in a mattress." And you need to remember that the problem isn't "hoarding" it's relative degrees of liquidity.

5. re: "And, we have a modern record on this very issue. Only Scott Sumner and the market monetarists were saying that money was too tight and could be loosened to accommidate demand in 2008 and 2009. The "Keynesians" were all saying that the Fed was "out of bullets" and were pushing for so-called "fiscal stimulus"." OK this is a patent misrepresentation. Market monetarists have trouble defining exactly what accommodation is - it's one of their big blindspots.

Because there is no "goods in general", it is a confusion to assert that we should increase the demand for ANY goods because that will, by definition, increase the demand for "goods in general". This is Mill's core critique and it applies as well to Keynesianism as to underconsumptionism proper. He is attacking the underconsupmtionist CURE.

Note too that his brief discussion of the over-heated boom echos an Austrian explanation of the causes. As Ricardo said, the real initial causes of recession are that "men err in their productions, there is no deficiency of demand". I believe Ricardo and Mill both thought of "demand" purely in "real" terms and including demand for money as "real" demand. Hence today's loose use of "demand" to be either "real" or "nominal" is ripe for confusion when seeking to understand Ricardo and Mill. They aren't saying that we can't have an excess demand for money. In fact, that's their point. There is no "deficiency" of "demand". Demand in the aftermath of a bust may temporarily shift to demand for money rather than particular goods. The solution is NOT to have the government step in and "fill the gap", buying goods because people for that moment won't. The main reasons this is bad is the same reason socialism is inefficient: they lack the knowledge and incentives to produce real value and thus tend to destroy value.

The linchpin of the Keynesian model is the "liquidity trap". Its only through this claim that monetary policy magically loses the ability to meet money demand that Keynes can attempt to claim that focusing on the using up of real resources can or should be the answer. Mill doesn't address this idea because Keynes hadn't asserted it yet. It is false. As Scott Sumner loves to point out, there is no "liquidity trap" as a true economic phenomena. It is only a product of central banks who mistake reactive market mechanisms for active policy tools.

I will quote from a comment made at the money illusion by Dtoh, which sums this up quite well:

----

Most errors in monetary theory are a result of failing to correctly understand and distinguish between Tools, Mechanisms, and Targets.

The errors of New Keynesianism are: viewing interest rates as a tool rather than a mechanism, failing to recognize that real rather than nominal interest rates (prices) are the mechanism, and focusing on the wrong target …… RGDP rather than NGDP.

----

I have no idea if any of this comment will be remotely helpful in understanding why I consider this essay so central. You could say that "Macro Follies" is inspired by this essay. The only reason I used Say instead of Mill is because of the unfortunate naming of the law of markets as "Say's Law". I didn't want to fight the history of language at the same time that I fight the aggregation fallacies Keynes and Malthus.

Say was not as clear as Mill. I'm not sure Say actually understood the law for which is name is attached as well as Mill. And when Say finally admits that there can be an excess demand for money, he is coming into line with Mill, not Malthus.

The point that OMOs are the tool, and interest rates a mechanism is one I make a lot on here John. I have said in the past that I wish OMOs were on the LHS of the Taylor rule. The reason they don't is because of concerns about the endogeneity of money. That's fair enough - you probably couldn't get a good stable OMO rule the way you have the Taylor Rule. I'd still like to see it. But I don't think this is as problematic as you're making it out to be.

MMers are a lot worse than this - they regularly treat a fall in NGDP as a Fed policy rather than the outcome of a Fed policy. That's a very misleading way to talk about things.

I don't know why you are so reticent to acknowledge that people you ideologically disagree with or who Boettke has defined out of the "mainline" are saying the same thing as Mill. It's very awkward to say that Say and Mill understood that an excess demand for money could be a problem but Malthus and Keynes didn't. Most people would think you've seriously misunderstood the history of thought. I think it's more that you're bending over backwards to present the story you want to present.

I've laid out precisely where Mill departs from Malthus and Keynes. It's not that an increased demand for money unmet by increased supply is a problem. That is what is shared. It's what does and does not address that problem. Malthus thought increased consumption to use up the goods on the shelves that were "overproduced" should do it. This is wrong. Keynes thinks ANY spending, even if it's consumption, government and/or utterly wasteful would do it. This is also wrong. The classical view which flows through to Hayek and today to Selgin, White and the market monetarists is that ONLY an increase in the supply of money to meet demand will address it.

Money, as Mill notes, is a commodity. "All goods" is not a commodity. It's an accounting entity. A linguistic fiction. A construct, just like "aggregate demand" or "the price level".

If people demand more money, meet their demand. Selgin lays out why a free banking system would accomplish this due to changes in the composition of bank liabilities towards notes. The Fed, more crudely, can do it through open market operations, even though Keynesians claim this "loses traction" at the "zero-bound" (false). As Scott Sumner has said, there's never been a fiat money central bank which sought to create inflation and failed. The Fed could, tomorrow, stop paying banks not to lend (IOR) and start buying every outstanding treasury bill. All 16 trillion. Think that would fail to produce inflation? Think it would collect in hoards as if the demand for money is infinite? This is the uniquely "Keynesian" claim.

Hell, I've come across older Keynesian writing from Paul Samuelson which rejects the very notion that the Fed has any impact on the price level.

Hayek called money a "loose joint".Keynes breaks the joint all together in TGT.

I do think it's strange that this happens, given Keynes early writings on inflation and money. My own theory is that Keynes may have become a monetarist had he lived longer.

re: "ONLY an increase in the supply of money to meet demand will address it."

But you JUST TOLD ME that it's a structural problem.

I can't keep you straight John.

(btw - like I had said, Malthus was an underconsumptionist and Mill provides a good argument on that point. He sides with Malthus on other points. He does not provide a counter-argument to the Keynesian claim that I have seen).

I haven't looked into free banking extensively but the problem with that seems to me to be what happens to bank balance sheets when a recession hits that prevents them from doing this. I have posed this to Austrians in the past - their answer "if there is free banking there won't be a problem with recessions".

re: "Think it would collect in hoards as if the demand for money is infinite? This is the uniquely "Keynesian" claim."

Sentences like this are why you should stop mocking JSTOR and use it instead.

re: "I do think it's strange that this happens, given Keynes early writings on inflation and money."

And of course, Mill clearly and rightly rejects the Keynesian notion that innovation or capital accumulation could be a bad thing. There isn't going to be any long-run diminishing of investment opportunities such that the so-called marginal efficiency of capital falls to zero.

You yourself said, if I recall correctly, that there is no "Keynesian" growth model. So I don't understand where Solow comes in here. Keynes worried about running out of investment opportunities such that the marginal efficiency of capital fell to zero, did he not?

This is where the hermetic contrivance of the "short run" and the "long run" damage the discussion. I reject these notions except insofar as the "short run" is defined as a period during which a policy has yet to take full effect and the "long run" is after it already has. So one-time increase in the money supply in excess of demand will not immediately push up prices. During this "long and variable lag" period, we're in the "short run". Once prices have adjusted, we're in the "long run".

But the mechanism through which real growth occur do not divide between the "short" and "long" run in this way. Current investments in new innovation, what Keynes worried would cease to occur, are the engine which lead to increased real output and thus an increased volume of exchange ("growing economy"). Period.

re: "Keynes worried about running out of investment opportunities such that the marginal efficiency of capital fell to zero, did he not?"

Yes, he did, but this is not a "Keynesian" position. I don't know of any other Keynesians that talked about this (not saying there aren't any - I'm sure there were - the point is it is not Keynesians). Keynes also believed in eugenics. Do you think eugenics, and the reasons were somewhat related in fact. Do you think eugenics is a "Keynesian" position? Be serious, John.

re: "I reject these notions except insofar as the "short run" is defined as a period during which a policy has yet to take full effect and the "long run" is after it already has."

So in other words you don't reject "long run" and "short run".

This is what is so frustrating about you. You either bully people for thinking a certain thing with no grounds or you bully people and then turn around and accept exactly what you just rejected.

The distinction between the long run and the short run - in both macro and micro - is the distinction between when only some things have adjusted and when all things have adjusted. Context determines what that means in any particular situation.

And what's frustrating about you is that you re-imagine what people say and reply to your version. I haven't mocked people for putting effort into studying economics. Not at all. That would be hypocritical considering how much time I've put into studying economics. What I've criticized is the output of the economics profession in terms of its impact on our cultural understanding. I've mocked Keynesian economics, because I believe it is both theoretically wrong, politically naive, empowering to elites, and unsupported by the historical record. I've mocked the idea that consumption can grow the economy. And since the profession has pushed these fallacies, I criticize it.

But this is NOT mocking people for studying economics. It's simply criticizing terrible economics. This is your usual tactic, though. Move the goalpost of the conversation.

And I've noticed that there's very few posts (compared with the frequency of incidents) on this blog taking Krugman or Delong to task for their mockery, personal attacks, mischaracterizations, etc. You've spent MUCH more time attacking me. I think this is all about ideology. They're more in line with your ideology, so you give them a pass. I'm not nearly as caustic or personally-oriented or prolific in my criticisms, but I'm attacked repeatedly. Double standards.